Here are some common challenges setting a price for a product or service and strategies that have helped Stanford Embark members overcome them.

“How do I figure out what price people are ACTUALLY willing to pay?"

The question “How much would you be willing to pay for the product I have just described?” is likely to generate a very biased answer. People may approach this like a negotiation and hedge. Or they may tell you what they want to pay vs. what they would be willing to pay.

Sometimes it is better to describe the product at a particular price point and ask them if they would buy it. Even in this situation you are still likely to yield an upward-biased result; people’s intentions are often higher than their actual behavior. You need to talk to many customers to get their responses to a range of different price points. Use the opportunity to explore the thinking behind their response. What is really valuable at this stage is not whether they say “Yes, I would buy it” or “No, I would not buy it” but the THINKING behind their decision.

"How do I quantify the value that a customer will get from my product?"

This is often much easier for a B2B (business to business) product, since businesses often have clear processes that dictate the economic value of the products and services they choose. For a B2C (business to consumer) product, the value may be associated with things like emotional feeling of well-being, increased social confidence, and other things much harder to quantify. In these cases, it is important to try to find existing products that deliver analogous benefits, and use the price that people pay for those as measures of the value they receive. For example, let’s say that the principal benefit of your proposed solution is peace of mind. What other products deliver peace of mind? An alarm system is one way people choose to ensure peace of mind, and people are willing to pay hundreds of dollars plus a monthly subscription fee for that benefit. People also put locks on their doors, which provides a different level of peace of mind at a different cost.

A Word From An Entrepreneur

TJ Duane, CEO and Co-Founder of BrightCrowd, discusses the challenges faced when aiming to determine and confirm the value of solving the identified customer need.

Explore a price setting example

Imagine you have invented a new type of the light bulb based on a light-emitting diode (LED) to replace traditional incandescent light bulbs. The value proposition for your new product points out two principal benefits of the new LED bulb:

  1. It lasts longer than an incandescent bulb. Your lab tests suggest that the useful lifetime of an LED bulb is 10,000 hours (ten times that of a conventional incandescent bulb).

  2. It's more energy efficient. An LED bulb can produce the same amount of useful light as a 60 watt (W) incandescent bulb using only 10W of electricity.




 

How will you price your bulb?

A) Based on what it costs to produce

B) Based on the price of other lightbulbs

C) I'm not sure


 

Open up your workbook to Activity 6, or download the workbook, and work through the process of setting your price.